Address to the Australian Services Roundtable
Speech
Canberra
17 March 2010
Introduction
The Australian trade portfolio deals with some complex policy issues. One of the biggest is the challenge posed by the globalisation of services exports.
The main difficulty in increasing services exports is an enduring paradox about trade in goods and services.
This is that while the GDP of an advanced nation tends to be based mostly in services, its exports tend more often than not to be based in goods.
In part, this paradox reflects the fact that many services were traditionally difficult to export.
However, the global services sector is undergoing a substantial transformation as a result of new information and communications technology.
Services that were once non-tradeable --such as software programming, engineering, design, tax returns, medical advice, and professional services-- can now be offered anywhere in the world.
In Australia’s case, about 73 per cent of GDP is derived from the services sector, which employs four out of every five Australians. And in the case of the United States, it’s estimated to be 80 per cent of GDP.
Yet on current ABS estimates, services exports comprise just 21 per cent of our total exports.
There is some debate about whether the ABS figures underestimate services exports.
For example, income to services firms operating overseas is not counted as a services export, and some goods exports embody services inputs which remain uncounted.
Nonetheless, it is important to note that in 2007-08, just 6.5 per cent of Australia’s 45,000 exporters were in services.
The challenge for policymakers is to find a sensible way to help exporters of services get beyond this paradox.
That means helping them to increase their share in overall exports, particularly in what we call the high “value-added” sector.
Despite the progress over the years in global and bilateral free trade agreements, the market for services remains one of the most protected in the world.
These national barriers range from monopoly regimes, licensing rules or procedures and qualification requirements, to rules relating to the temporary entry of services providers.
Typically, these protected markets involve high levels of government intervention in sensitive areas such as telecommunications and health, or professional services such as law and medicine.
The Australian Government believes that a breakthrough in services liberalisation will lift the share of services in exports to the benefit our broader economy.
This aim was an early priority for the Government, and was made crystal clear at last year’s Global Services Summit in the US.
Today, I’d like to say a few words about how the Government views these challenges and what we’re doing to help our services exporters.
The Uniqueness of Services Trade
The Economist magazine once famously defined a “service” as something you can’t drop on your foot.
That definition might not really take us very far, but we all know what that august magazine meant.
Services are intangible. They involve goods but, unlike goods, they can’t just be simply shipped or freighted abroad like oranges or cars.
How can you export the clinical advice of a doctor, the taste of an architect or the skills of an engineer? How do you export how to teach a child to solve a quadratic equation?
Traditionally, services exporters facing these problems have had to find different methods to sell their products overseas.
That means setting up a commercial presence abroad, sending someone in to do the job, having a customer visit your country or selling the service over the phone or Internet.
Of course, services exporters still have similar problems of market access which goods exporters face.
But as a rule, services exporters come up against a more intractable set of access issues which involve the sensitive topics of immigration, investment and regulation.
Services firms often need to follow their domestic customers into foreign markets, so investment and investment regulations are critical issues.
In the Government’s view, however, these problems are worth solving. The opportunities that services trade offers to the broader economy are profound, and I have two in mind.
The Economic Case for Services Exports
- Firstly, we need to remember that trade is an engine of growth and a driver of productivity.
Trade relies on the specialisation of goods and services; in other words, it relies on a nation’s comparative advantage.
Another benefit of trade is that it can increase the potential size of a market for an exporter, creating economies of scale and higher productivity.
This higher productivity, in turn, allows exporters not just to pay higher wages but also to grow faster than less productive firms, thereby spreading productivity throughout the entire economy.
Because they embody an economy’s knowledge, information and production techniques, services underpin the entire workings of a modern economy.
This potential to add value to services exports represents an important source of growth in income and productivity for an economy.
- Secondly, services trade is one of the fastest growing segments of global trade. This counts a lot for us when you consider that Australia is on the doorstep of the world’s fastest growing economic region, the Asia Pacific.
Seven out of Australia’s top ten export services markets were in Asia in 2008-09; China is now Australia’s second biggest export services market after the US.
Australia exported about A$53 billion worth of services in 2008-09, an increase of 5.2 per cent in value terms and an increase of 1.8 per cent in volume terms.
Australia’s financial services exports alone, for example, increased by 13.2 per cent to A$1.2 billion in 2008-09.
Great examples of services successes are the role of Macquarie Bank, Mallesons Stephen Jaques and Computershare in IPO floats on the Hong Kong Stock Exchange.
Education services—by far our biggest services export—increased by 23.2 per cent to A$17.2 billion; professional services by 12.2 per cent to A$3.7 billion, and telecommunications and IT by 12.1 per cent to $2.1 billion.
Given that the GFC saw the biggest decline in trade volumes since the Great Depression, the growth rate in services is significant because it is evidence of potential future growth.
Australia’s five year trend for services exports is 7.8 per cent and more importantly, this growth is a broader trend across the world.
World services trade, for example, grew by 12 per cent in 2008 to reach a total of US$3.9 trillion. Between 2000 and 2008, before the GFC, global services exports increased on average by 14 per cent a year.
To a large extent, the growth in services exports reflects important developments closer to home.
The established and newly industrialising giants of Asia are buying Australian commodities, but they also need the intellectual capital which Australian services exports can provide.
The principle here is that goods production works hand in hand with services provision; a new mine requires specialized mining services; cars require mechanics; food production needs health and safety standards.
China and India are leading the world out of the GFC, with their average growth rates last year much higher than the advanced world’s.
China’s growth offers Australia’s services sector the great opportunity to help build that nation’s urban and financial infrastructure, and help to provide its energy and food requirements.
Up to 400 million Chinese will need housing over the next generation.
In China, there are also opportunities for Australian green urban designers and clean energy suppliers as well as companies which provide services to the mining sector.
Throughout Asia, Australia’s financial management skills will be of great use to Asian consumers as their incomes rise in tandem with higher growth.
And of course Australia’s educational institutions are playing a big role in helping to shape future generations of Asia’s students.
What the Government is Doing
The Government is finding ways to help services exporters, including:
- Australia’s commitment to the Doha Round of the World Trade Organization and the General Agreement on Trade in Services.
- Australia’s six Free Trade Agreements –four of them in Asia--which go a long way to promoting trade between nations, including trade in services.
- On January 1st this year, Australia’s latest FTA, known as the AANZFTA, began operation. AANZFTA will create a single free trade bloc of 600 million people with a combined GDP of A$3.1 trillion.
- Australia has another seven FTAs under negotiation, including with China and Japan, and two more under consideration with India and Indonesia.
- The Brand Australia program that is being facilitated through Austrade will redefine our image to present Australia as an advanced and sophisticated society, not just a collection of beaches or mines.
- The Government is committed to further microeconomic reform to improve productivity, especially by reducing red tape and other impediments to business.
- The Government has also embarked on a major infrastructure program to rebuild the nation’s roads, ports and railroads.
- A planned high speed national broadband network will have a direct effect in services exports because of the greater power it will provide to cross-border Internet trade.
Conclusion
In conclusion, I’d like to note that cooperation between the private and public sector is also critical for exporters, just as it has been for the world to get beyond the GFC.
In the case of legal exports, which have grown strongly over the last decade, the Government supports the International Legal Services Advisory Council’s efforts to promote them.
The Council brings together distinguished figures from the public and private sectors to help determine how best to sell our legal expertise abroad.
Last year I had the pleasure of launching the Council’s new export strategy which will be an exporting guidebook for law firms and law schools in the years ahead.
Another example of cooperation has been the decision by the Department of Foreign Affairs and Trade, and other agencies, to support the Roundtable’s push for greater accuracy in services statistics.
The Roundtable commissioned ACIL Tasman to do this and their excellent report, which estimates that services represent closer to 40 per cent of total exports, will be critically important for determining future policy.
It has been a pleasure to address the Roundtable today on such an interesting – and intricate!—subject as services exports.
Thank you.
ENDS